Securities lending in 2023:
So far, so (very) good. 

CACEIS’ Securities Finance desk takes a look at the current lending market, the hot topics that might drive change, and the opportunities this year for clients looking for extra performance.

This article is part of the 2023 Spring Magazine, which can be accessed here.  

 Off to a good start: a very positive Q1 for lending revenue.

The industry had doubts about how it would top the exceptional year 2022 but we are doing well so far. Total securities lending industry revenues for Q1-2023 are up 24.5% on the same period in 2022, reaching $3.414bn according to S&P Global. This makes Q1-2023 one of the best performing quarters in recent history, with an average lending fee of 53bps - up 39% on the same period in 2022. DataLend confirmed this, revealing a year-onyear worldwide increase across all asset classes of 27%, even with a 5% fall in loan balances.

How do we explain these excellent figures? Firstly activity on US equity specials continues to heat up, and in the EMEA equities space, Swiss equities have pulled ahead. The only notable decline has been on ETF activity. On the fixed income side, corporate bonds fees are on the rise but with the liquidity that will become less abundant, especially with the end of TLTROs and various ECB programs, we all anticipate a rising demand for HQLA assets as well. The second semester will be very interesting indeed.

What are the industry hot topics in 2023

Regulation is the first topic for the lending industry. The main focus now being on the incoming Basel CRR3 and CRD6 putting pressure on balance sheets, which shall push for more client selectivity from agent lenders based on capital requirements and RWA consumption. Regarding CSDR’s settlement disciple regime, we observed that it is now well established but questions around a mandatory buy-in process scheduled for 2025 remain, although it seems SFTs will be exempt. Another theme is coming from the level 1 review of UCITS and AIFMD which might constrain buy side players acting as agent lender for their own funds to justify on the split of the revenues they take.

A second key topic is indemnification, as it is still a dilemma for agent lenders that haven’t yet stepped up to solve it. Indeed, these clauses are somehow still offered to clients despite the high cost of it. That is why, for instance, some agents now favour special transactions, stating indemnified GC transactions lack profitability, but clients are not ready to give up this clause and agents are struggling to stop providing it, aware of the fierce competition.

The third topic we can identify is obviously the challenges of technology. Similar to any industry, we need more data and granularity to answer clients’ and market players’ needs. For example, we need finetuning benchmark data especially for less liquid small capitalisation or corporate bond type assets to ensure clients have benchmarks aligning with best execution standards.

Another example would be on the dynamic collateral selection required by ESG-oriented clients, which is heavily dependent on IT and costly data like ESG indexes. Automating AGM data collection and management to ensure timely securities recalls is also major a challenge that only technology will help address.

Why securities lending is still a great opportunity for beneficial owners in 2023

Three main themes are emerging for beneficial owners this year: ESG, cash reinvestment and collateral pledge.

Regarding ESG, regulators had been clear about the important role securities lending plays in financial market efficiency. So, the consensus we are seeing amongst ESG/SRI lenders that lending can be compatible with their portfolio strategy is very important. The difficulty comes from the variations in the approach. To resolve this, the International Securities Lending Association (ISLA) has drafted a set of good practices for ESG matters which establish a comprehensive framework for action. This will certainly help beneficial owners fine tune their lending programme.

Regarding cash reinvestment, the positive interest rate environment has changed the perception of the asset owners on the possibility of reinvesting the cash received as collateral. Nevertheless, the investment supports remain an essential choice for the client. It must be sufficiently secure not to increase portfolio risk, that is why so far, most reinvestment is currently performed via money market funds.

The third theme concerns pledge structures which can allow agent lenders to maintain an aggressive profit split or even offer a better one. Data providers note that pledge (as opposed to transfer title) structured transactions doubled last year so there is clearly a trend here and clients willing to accept this type of collateral have an excellent opportunity to enhance the profitability of their lending programme.

Donia Rouigueb - Head of Sales Securities Finance and Repo: “Regulation-driven transparency and ESG-focused best practices is good news for lenders as it gives them confidence to lend their securities, they are enhancing the value for their investors and playing a key role in maintaining market liquidity.”

Securities lending is safer than ever and remains a legitimate source of additional revenues for beneficial owners into 2023, and as long as the constraints service providers face are not too restrictive, clients and their end-investors will continue enjoy the performance enhancement possibilities in this promising market.

CACEIS is an asset servicing banking group dedicated to institutional and corporate clients and one of the world’s market leaders in asset servicing. CACEIS’ Securities Finance desk designs bespoke securities lending, borrowing, liquidity and collateral management services for its clients, leveraging its group’s core asset servicing activity as well as a broad regulatory expertise to meet its clients’ specific risk/return requirements.

Julien Berge and Olivier Zemb both joined CACEIS in 2019 respectively as Head of Fixed income & repo in Luxembourg and Head of Equity Finance & Collateral Trading in Luxembourg.

Donia Rouigueb joined CACEIS in 2015 and is currently Head of Sales for Securities Finance and Repo services, developing tailormade products for institutional, asset manager and corporate clients of the custodian franchise.